The Morning Cup of Jo

What? You want me to Trin my Arms?

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Yesterday on Buzz and BanterProfessor Succo brought up an excellent point about the ST (short-term) secondary momentum indicators such as the TRIN, or more commonly referred to as the ARMS index. He mentioned a broker was running around yelling about the ARMS index being extremely high and it's a great buying opportunity. Since the S&P 500 broke its IT (intermediate-term) trend yesterday, I thought it a good idea to take a further look at the TRIN Index.

The TRIN (Short-Term Trade Price Index) developed by Richard Arms - hence Arms Index - determines the ST momentum of the market. Its intended use is as a contrarian index. The ratio calculation is very simple. ((Advancing issues/Declining issues)/(Advancing volume/Declining volume)) Thinking about it logically, if there are ½ as many advancing issues than declining, with ½ the volume on the advancing side, the index reads 1. ((100/200)/(500/1000)) = 1 The contrarian view comes into play when the index reaches new relative highs. (Divergence - prices decreasing, TRIN increasing) {ie. When everyone is on the same side of the market, the market will go the other way.} However, this is not always the case.

One important fact about momentum indicators is the false-positive readings during times of changing trends. Think about the theory for a second and then realize that there are many more technically proficient investors in the market today. Now assume more investors were watching this 11-month trend line and when the S&P 500 broke it yesterday, well you get the picture. Many of the momentum indicators act the same way. The Stochastic is the biggest culprit of the "changing trend" false-positive readings.

Below you will see an example of how this has happened in the past. The first graph is the S&P 500 index and the TRIN back in November of 2000, when the S&P 500 broke its IT Trend. The second is yesterday's graph of the S&P 500 with the TRIN.

CURRENT MARKET

On the second graph you will also notice when the S&P 500 broke its ST (short-term) trend and 50 DMA, 9-days ago, there was also a false-positive reading. That sure wasn't a buying opportunity.

Don't get me wrong; the TRIN, and many other momentum indicators, can be very useful when the market is continuing along its upward trend line. However, you want to keep this little tidbit of information about false-positives in your toolbox, or it could be very detrimental.

I Hope this Helps!!

On a side note ... I have received multiple comments about the graphs being hard to read or fuzzy. We're working on a solution. Thanks for your patience.

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